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Source: Tribunal | | 26/02/2018

A recent First-Tier Tribunal case examined whether a father's payment of wages to his son was an allowable expense. We learn that the appellant in this case made a number of payments to his son whilst he was studying at university. HMRC questioned the validity of the appellants tax return and argued that any amounts paid by the appellant to his son must have been incurred wholly and exclusively for the purpose of the appellant’s trade in order to be deductible against his self-employment income.

Following the provision of further information, HMRC allowed some expenses and by the time this case reached the Tribunal only the payment of wages to the appellant's son of £7,400 was in dispute. We are told that the wages payment was based on 15 hours per week at £10 per hour for the 'promotion of the business through internet and leaflet distribution and computer work'. The appellant was unable to demonstrate that his son had worked for the hours stated. In fact, on closer examination, HMRC were able to discern that the payments classified as wages included the provision of groceries and home insurance for his son and also cash totalling £1,850.

HMRC argued that the payments were not expended wholly and exclusively for business purposes but were dual purpose payments where all or part of the reason for the payments was out of a 'natural parental love and affection' and/or 'personal benefit'. This meant that the payments were not incurred wholly and exclusively for the purpose of the appellant’s trade. The court agreed with these assertions and the appellant's appeal was dismissed.

Planning note

Interestingly, the Tribunal accepted that had the appellant paid his son using a time recorded basis or some other form of methodology that demonstrated the work was done then the claim could well have been successful. The key issue here was that the appellant was merely using his 'work' to make payments to his son without any valid reason.

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